Beyond GDP: Measuring The Health Of Our Lives
The economy is doing well. No, the economy is in trouble. Job growth is strong. Job growth is actually weak, and employers plan on scaling back hiring.
Gross Domestic Product (better known as GDP) is expected to grow briskly. Sadly, that’s not the case: GDP is actually going to drop, and the economy is shrinking.
As the years go by, we hear these sorts of statements every day, from politicians, media pundits, and economic analysts. At the same time, we observe how the economy is performing in our own backyards. Most of all, we take our own life experience into account.
Do we have money in our pockets, or are we struggling? Even if we’re earning a decent amount of money, are we able to save, or are wages entirely consumed by housing, transportation, health care and other expenses?
What about other measures of our lives? Are we working every moment, or do we enjoy balance with our personal lives? Do we live in safe communities? Is local government effective, or is it corrupt and untrustworthy?
Do we know our neighbors, and feel connected to those around us, or are we strangers? Are we facing rampant environmental destruction, or do we live in a clean, healthy environment? Simply put, are we living well?
These are important questions, which cut to the very core of what it means to be a healthy society. Yet, while GDP, especially per capita GDP, is an important measure of the economic health of a society, it is far from complete. How can we include relevant measures of societal health, to provide a fuller picture of whether a society is a good place to live?
What Is GDP?
First off, it’s important to apply a working definition of GDP. GDP is, in short, the total value of all goods and services produced within a country during a specific time period. GDP can be assessed on both a quarterly and annual basis, and can also be calculated per person (known as GDP per capita).
GDP is calculated using a few different methods. One of the most widespread approaches looks at consumer spending (i.e. purchases of goods and services), plus government spending and private investment (mostly by businesses), as well as exports minus imports.
Another method considers the production of goods (based on the total value of economic output). While the details of each way of calculating GDP is beyond the scope of this discussion, as a general rule, GDP measures economic activity.
However, GDP fails to consider how a particular economic activity impacts society, especially from a social and environmental perspective. Production and sale of cleaner energy sources is treated no differently from coal or fossil fuels, even though the latter have greater negative environmental impact.
Additionally, GDP offers minimal insight into the economic distribution of wealth within a society, or deeper quality of life questions. Strong economic activity, especially if concentrated in relatively few hands, does not ensure sufficient access to healthcare, or public safety, or a health environment.
Now, to be clear, GDP does have a role to play. It gives us an idea of whether an economy is growing, and roughly how well off the average person in a society is (through per capita GDP).
Economic growth is critical to alleviating poverty in developing nations.There’s little doubt that poverty can be incredibly debilitating, both physically and mentally. In more developed countries, growth helps raise the standard of living. Increased GDP can be an indicator that we’re moving in the right direction.
However, GDP, is at best, one measure (amongst several) which we should consider. Let’s take a look at some alternatives.
The Better Life Index
The Organisation for Economic Cooperation & Development (OECD) is an intergovernmental organization, with 36 member nations. Each year, the OECD puts out the Better Life Index, which ranks it’s member nations on a variety of dimensions, including income, housing, jobs, safety, work-life balance, community, civic engagement, health, overall satisfaction with life, and more. This index provides a more comprehensive picture of the quality of life in various countries.
For example, the United States ranks quite high for income and jobs, but considerably lower for work-life balance and community. Mexico fares well in measures of civic engagement and life satisfaction, but does poorly when it comes to questions of income and public safety. Luxembourg does well on nearly every measure.
What’s so compelling about this approach, is that it paints a more comprehensive picture of our lives. A nation where people earn high incomes, but have poor work life balance (such as the United States), might be a more challenging environment to raise a family than Switzerland, where work-life balance is higher, even though incomes are a bit lower (but not drastically so).
At the same time, on average, the United States is almost certainly an easier place to live than Mexico or Turkey, where both income and work-life balance are considerably lower. Places where public safety is a major concern, or with a serious shortage of affordable housing, often result in a major reduction in quality of life.
Thus, it’s wise to look beyond GDP, to a larger range of measures, which give us a better indication of the overall state of a nation. The Better Life Index is a step in the right direction.
The World Happiness Report
In 1972, the king of Bhutan, Jigme Singye Wangchuk stated that “Gross national happiness is more important than gross domestic product.” In the years that followed, Bhutan created a Gross National Happiness (GNH) index, which aimed to consider both standards of living, as well as less traditional markers of societal well being.
The GNH looks at living standards, health, education, good governance, ecological diversity, time use, psychological well being, cultural diversity, and community vitality. Some of these factors, like ecological diversity and good governance, look to how citizen’s of Bhutan perceive governance or the environment, and admittedly, are rather subjective.
The GNH eventually helped inspire the World Happiness Report, which aims to consider a variety of factors that influence happiness within a nation. This report, prepared by economist Jeffrey Sachs and other experts, looks at questions like the link between government and happiness (often driven by perceptions of corruption), pro social behavior (such as generosity within a community) and overall happiness, and how technology impacts (and is impacted by) happiness.
Using the metrics of GDP per capita, social support, healthy life expectancy, freedom to make choices, generosity, and perceptions of corruption, Finland ranks as the happiest country in the world, followed by Denmark, Iceland and Norway. The United States ranks #19 (4 spots above Mexico), and just below Belgium.
Interestingly, the United States enjoys a higher per capita GDP than Finland, Denmark, Iceland and Norway, yet ranks below each country in overall happiness. I don’t say this to criticize the United States — as an American, I feel quite happy with my life.
Again, GDP certainly matters. Without money, it is much harder for people to meet their basic needs, not to mention fulfill their human potential.
Yet, this report underscores the fallibility of GDP (including per capita GDP), as a sole measure of quality of life. It is doubtful that a society with a high per capita GDP, but weaker community ties and reduced life expectancy, is better to live than a place with somewhat lower (but still good) per capita GDP, a stronger sense of community, and people living longer lives.
Genuine Progress Indicator (GPI)
GPI seeks to take fuller measure of the social, economic and environmental health of a nation. It takes into account a variety of factors which contribute positively to socioeconomic health, including net capital investment, adjusted personal consumption, services of highways and roads, volunteer work, and domestic labor. GPI also considers a range of negatives which detract from the economic and social standing of a nation, including ozone depletion, family breakdown, automobile accidents, income inequality and underemployment.
GPI seeks to correct apparent shortcomings of GDP. For example, GDP considers both the economic growth resulting from increased pollution (such as goods delivered by energy inefficient trucks with high carbon emissions), as well as the money spent ameliorating the impact of pollution (such as environmental cleanup efforts). In other words, GDP is largely indifferent to the social impact of economic activity.
GDP also does not assess the distribution of wealth. Are there a few very wealthy people, but a majority of the population is poor, and lacks sufficient access to healthcare and education? Or are living standards more equitable, with a broad cross section of the population living fulfilled lives?
In short, GDP measures economic activity, but it does not consider whether such activity is in fact beneficial to society, or how it is distributed. GPI aims to deliver a more comprehensive, balanced picture of our economic health.
In 2010, Maryland became the first state to officially adopt GPI as an alternative to GDP, and both Maryland and Vermont report GPI annually. GPI has been calculated for around 20 countries around the world, and is becoming a more widely accepted measure of economic growth.
The Inclusive Wealth Index (IWI)
The Inclusive Wealth Index (IWI) is another fascinating alternative to GDP. The IWI measures the social value of manufactured capital, the social value of human capital, and the social value of natural capital, to reach a measure of inclusive wealth, which is defined as a positive change in human well being.
The social value of manufactured capital considers factors like investment, depreciation, output growth and productivity — many of the standard measures of GDP. Natural capital looks at the social value of fossil fuels, forest resources, agricultural lands and fisheries. Human capital considers mortality, educational attainment, labor force by age and gender, and so on.
In short, these factors aim to consider whether economic growth is sustainable, and ultimately, the social and economic impact of such expansion After all, quickly growing our economy, but depleting our resources in the process, is hardly an effective path to sustainable, long-term prosperity.
How To Escape the GDP Trap
Clearly, we have some excellent alternatives to GDP, each of which is very much worth considering. None of these models are perfect, but each offers a window into our social and economic health.
However, GDP (in this umbrella I include per capita GDP), remains stubbornly lodged in our consciousness, as an effective measure of economic health. How do we expand our focus, to consider other metrics, like the ones discussed here?
Any change will have to start with economists. Economists, particularly those who serve in influential capacities in the World Bank, the International Monetary Fund (IMF), Council of Economic Advisers (CEA) and the Federal Reserve and other central banks, guide our economic trajectory.
What’s needed are economists with a heterodox approach to their craft, who are willing to think outside of conventional norms. Amos Tversky and Daniel Kahenman, in collaboration with Richard Thaler, accomplished this in developing the field of behavioral economics.
In a similar vein, we need more economists who are focused on broader measures of societal health, and are ready to spread such ideas in their spheres of influence, and beyond. They will undoubtedly face resistance from some of their colleagues, who are comfortably entrenched in a GDP-focused status quo.
However, as the years go by, the Overton Window can be shifted, allowing us to reduce emphasis on GDP. These ideas ( the economists who support them) will find their way into more important and influential roles, and help prompt a shift in thinking.
I’m under no illusions that such a shift will be smooth, or that it will happen overnight. Change isn’t easy. However, over time, a shift is possible. Ideas spread, and they bring change. It’s time to move away from GDP, as a singular, dominant indicator of our economic health.
